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CALGARY, March 20 /CNW/ - Bankers Petroleum Ltd. ("Bankers" or the "Company") (TSX: BNK, AIM: BNK) is pleased to provide its 2008 Financial Results.
During 2008, Bankers continued to be committed to its strategic priorities of:
- Increasing reserves and production in the Patos Marinza oilfield in
Albania;
- Exploring undeveloped acreage to identify and create development
opportunities;
- Pursuing new and proven technology applications to improve operations
and assist exploration endeavours;
- Spinning-off the U.S. assets and operations;
- Maintaining a strong balance sheet by controlling debt and managing
capital expenditures.
In 2008, Bankers was successful in achieving its objectives and remained
focused in implementing these initiatives:
Results at a Glance 2008 2007 %
-------------------------------------------------------------------------
Oil revenue 110,253 61,289 80%
Net operating income 51,141 31,956 60%
Net loss 1,587 1,134 40%
Cash provided by operations 49,032 22,319 120%
Additions to property and equipment 78,378 45,810 71%
Total assets 214,675 204,295 5%
Bank loans 28,125 30,805 (9)%
Other long-term liabilities 34,404 15,577 121%
Shareholders' equity 122,358 139,036 (12)%
Average production (bopd) 5,875 4,724 24%
Average price ($/barrel) 51.27 35.54 44%
Netback ($/barrel) 23.78 18.53 28%
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- Average production at Patos Marinza increased 24% to 5,875 bopd from
4,724 bopd in 2007. Exit production at year-end 2008 was 6,960 bopd
as compared to 5,337 bopd at year-end 2007. Current production is
approximately 6,200 bopd, with another 500 to 600 bopd shut in.
- Increased proved and probable reserves in Albania by 22% to
180 million barrels from 147 million barrels and increase Original-
Oil-in-Place by 150% from Two billion barrels to Five billion
barrels.
- Commenced drilling new wells, the first by Bankers in four years of
operations, and successfully drilled twelve vertical oil wells and
one horizontal oil well.
- Bankers acquired a 100% working interest in the Kucova oilfield and
is currently negotiating the acquisition of an exploration concession
in Albania.
- Revenue increased 80% to $110 million compared to $61 million in
2007. Net operating income increased 60% to $51 million from
$32 million in 2007. Cash provided from operations increased to
$49 million, a 120% increase from $22 million in 2007.
- In 2008, Bankers completed a plan of arrangement whereby all of the
U.S. operations and assets were split into a new independently
managed company.
- Bankers exited 2008 with an overall cash position of $20 million and
$28 million of current and long term debt; the working capital
deficit of $7.4 million includes a $17.5 million revolving credit
facility that is renewed annually.
With the sharp declines in oil prices and worldwide economic downturn during the fourth quarter of 2008, Bankers reacted promptly and chose a measured reduction of its capital expenditure program with an objective to remain self-funding from cash provided by operations, cash on hand and available credit facilities.
An addendum to the Plan of Development for the Patos Marinza field, maintaining the same work program and level of expenditures but over an extended period to reflect lower commodity prices, was submitted by the Company and approved by the national oil company "Albpetrol" and is currently awaiting Government approval.
The capital spending reduction initiatives, equity financing completed in early 2008 and divesting of the U.S. assets with no further capital spending requirements, kept the Company in a good financial position and well positioned to re-initiate an expanded capital program when confidence returns to the energy sector and higher oil prices are realized.
OUTLOOK
For 2009, we will remain focused on achieving our strategic priorities in a challenging economic environment. The three-year strategic plan for the Patos Marinza oilfield provides significant potential for growth in production and reserves through primary, secondary and tertiary extraction techniques. The 2009 strategic allocation of the work program and budget is flexible by having multiple capital spending scenarios that are oil price sensitive and is designated to provide additional recoverable reserves at the Patos Marinza and Kucova oilfields and still achieve an appropriate growth in production.
The Company's approach to managing liquidity is to ensure a balance between capital expenditure requirements and cash provided by operations, available credit facilities and working capital. To complete this budget, the Company undertook several financing and operational initiatives:
- Subsequent to year end, the Company received approval for an
$8 million increase to its existing credit facility, to $35 million.
- The Company also announced it has entered into negotiation with two
international banks for provision of a reserve-based long-term
financing of up to $110 million. This facility is expected to be in
place during the second quarter of 2009 after receiving final
regulatory, banks and board approvals. $10 million will be available
immediately, for environmental and social programs, the $50 million
first tranche will be available when the Brent oil price stabilizes
above $55 per barrel and the second $50 million will be available
when production exceeds 10,000 bopd and the Brent oil price
stabilizes above $62 per barrel.
- All necessary drilling and workover equipment are available and on
stand-by in Albania and will be re-deployed when favourable financial
conditions are attained.
- Bankers has signed an agreement with the developers of the Port of
Vlore oil export terminal in Albania for the storage and handling of
its oil in a 13,000 cubic metre Company-dedicated oil tank. The
storage facility will improve the Company's export operations and
allow for larger oil liftings when the terminal is ready to receive
larger vessels, expected in mid-2009.
Caution Regarding Forward-looking Information
Information in this news release respecting matters such as the expected future production levels from wells, future prices and netback, work plans, anticipated total oil recovery of the Patos Marinza and Kucova oil fields constitute forward-looking information. Statements containing forward-looking information express, as at the date of this news release, the Company's plans, estimates, forecasts, projections, expectations, or beliefs as to future events or results and are believed to be reasonable based on information currently available to the Company.
Exploration for oil is a speculative business that involves a high degree of risk. The Company's expectations for its Albanian operations and plans are subject to a number of risks in addition to those inherent in oil production operations, including: that Brent oil prices could fall resulting in reduced returns and a change in the economics of the project; availability of financing; delays associated with equipment procurement, equipment failure and the lack of suitably qualified personnel; the inherent uncertainty in the estimation of reserves; exports from Albania being disrupted due to unplanned disruptions; and changes in the political or economic environment.
Production and netback forecasts are based on a number of assumptions including that the rate and cost of well takeovers, well reactivations and well recompletions of the past will continue and success rates will be similar to those rates experienced for previous well recompletions/reactivations/development; that further wells taken over and recompleted will produce at rates similar to the average rate of production achieved from wells recompletions/reactivations/development in the past; continued availability of the necessary equipment, personnel and financial resources to sustain the Company's planned work program; continued political and economic stability in Albania; approval of the Addendum to the Plan of Development; the existence of reserves as expected; the continued release by Albpetrol of areas and wells pursuant to the Plan of Development and Addendum; the absence of unplanned disruptions; the ability of the Company to successfully drill new wells and bring production to market; and general risks inherent in oil and gas operations.
Forward-looking statements and information are based on assumptions that financing, equipment and personnel will be available when required and on reasonable terms, none of which are assured and are subject to a number of other risks and uncertainties described under "Risk Factors" in the Company's Annual Information Form and Management's Discussion and Analysis, which are available on SEDAR under the Company's profile at www.sedar.com.
There can be no assurance that forward-looking statements will prove to be accurate. Actual results and future events could differ materially from those anticipated in such statements. Readers should not place undue reliance on forward-looking information and forward looking statements.
About Bankers Petroleum Ltd.
Bankers Petroleum Ltd. is a Canadian-based oil and gas exploration and production company focused on developing large oil and gas reserves. In Albania, Bankers operates and has the full rights to develop both the Patos Marinza and the Kucova heavy oil fields. Bankers' shares are traded on the Toronto Stock Exchange and the AIM Market in London, England under the stock symbol BNK.
Review by Qualified Person
This release was reviewed by Abdel F. (Abby) Badwi, CEO of Bankers Petroleum Ltd., who is a "qualified person" under the rules and policies of AIM in his role with the Company and due to his training as a professional petroleum geologist (member of APEGGA) with over 39 years experience in domestic and international oil and gas operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis (MD&A) of Bankers Petroleum Ltd.'s (Bankers or the Company) operating and financial results for the year ended December 31, 2008, compared to the preceding year, as well as information and expectations concerning the Company's outlook based on currently available information. The MD&A should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2008 and 2007, together with the notes related thereto. Additional information relating to Bankers, including its Annual Information Form (AIF), is on SEDAR at www.sedar.com or on the Company's website at www.bankerspetroleum.com. All dollar values are expressed in U.S. dollars, unless otherwise indicated, and are prepared in accordance with Canadian generally accepted accounting principles (GAAP). The Company reports its heavy oil production in barrels.
This MD&A is prepared as of March 19, 2009.
NON-GAAP MEASURES
Netback per barrel and its components are calculated by dividing revenue, royalties, operating and sales and transportation expenses by the gross production volume during the period. Netback per barrel is a non-GAAP measure but it is commonly used by oil and gas companies to illustrate the unit contribution of each barrel produced.
Net operating income is similarly a non-GAAP measure that represents revenue net of royalties and operating, sales and transportation expenses. The Company believes that net operating income is a useful supplemental measure to analyze operating performance and provides an indication of the results generated by the Company's principal business activities prior to the consideration of other income and expenses.
The non-GAAP measures referred to above do not have any standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures used by other companies.
CAUTION REGARDING FORWARD-LOOKING INFORMATION
This MD&A offers our assessment of the Company's future plans and operations as of March 18, 2009 and contains forward-looking information. Such information is generally identified by the use of words such as "anticipate", "continue", "estimate", "expect", "may", "will", "project", "should", "believe" and similar expressions are intended to identify forward-looking statements. Statements relating to "reserves" or "resources" are also forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the resources and reserves described can be profitably produced in the future. All such statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Management believes the expectations reflected in those forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this AIF should not be unduly relied upon. These statements speak only as of the date hereof.
In particular, this MD&A contains forward-looking statements pertaining to the following:
- performance characteristics of the Company's oil and natural gas
properties;
- crude oil production estimates and targets;
- the size of the oil and natural gas reserves;
- capital expenditure programs and estimates;
- projections of market prices and costs;
- supply and demand for oil and natural gas;
- expectations regarding the ability to raise capital and to
continually add to reserves through acquisitions and development; and
- treatment under governmental regulatory regimes and tax laws.
These forward looking statements are based on a number of assumptions, including but not limited to: those set out herein and in the Company's Form 51-101F1 Statement of Reserves Data and Other Oil and Gas Information (NI 51-101 Report), availability of funds for capital expenditures, a consistent and improving success rate for well re-completions at Patos Marinza, increasing production as contemplated by the Plan of Development (PoD), stable costs, availability of equipment and personnel when required, continuing favourable relations with Albanian governmental agencies and continuing strong demand for oil and natural gas.
Actual results could differ materially from those anticipated in these forward-looking statements as a result of the risks and uncertainties set forth below:
- volatility in market prices for oil and natural gas;
- risks inherent in oil and gas operations;
- uncertainties associated with estimating oil and natural gas
reserves;
- competition for, among other things, capital, acquisitions of
reserves, undeveloped lands and skilled personnel;
- the Company's ability to hold existing leases through drilling or
lease extensions;
- incorrect assessments of the value of acquisitions;
- geological, technical, drilling and processing problems;
- fluctuations in foreign exchange or interest rates and stock market
volatility;
- rising costs of labour and equipment;
- changes in income tax laws or changes in tax laws and incentive
programs relating to the oil and gas industry.
The Company from time to time, updates its forward-looking information based on the events and circumstances that occurred during the period. As a consequence of the recent sharp declines in oil prices, the Company has adjusted its capital expenditure program accordingly to ensure that capital expenditures are funded by cash provided by operations, cash on hand and its available credit facility.
Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.
BUSINESS PROFILE
Bankers Petroleum Ltd. is a Canadian-based oil exploration and production company focused on maximizing the value of its heavy oil assets in Albania. The Company is targeting growth in production and reserves through application of new and proven technologies by a strong experienced technical team. All revenue is currently generated from its operations in Albania, which is located northwest of Greece in South Eastern Europe.
In Albania, Bankers operates and has the full rights to develop the Patos Marinza heavy oilfield pursuant to a License Agreement with the Albanian National Agency for Natural Resources (AKBN) and a Petroleum Agreement with Albpetrol Sh.A (Albpetrol), the state owned oil and gas corporation. The license became effective in March 2006 and has a 25 year term with an option to extend at the Company's election for further five year increments. The Patos Marinza oilfield is the largest onshore oilfield in continental Europe, holding approximately five billion barrels of original-oil-in-place. As of June 2008, Bankers acquired 100% of Sherwood International Petroleum Ltd., which has the full rights to evaluate and redevelop the Kucova heavy oilfield pursuant to a Petroleum Agreement with Albpetrol and a License Agreement with AKBN. The terms of the Kucova Petroleum Agreement, which became effective in September 2007, are substantially the same as those governing the Patos Marinza oilfield in Albania.
OVERVIEW & SELECTED ANNUAL INFORMATION Results at a Glance(x) 2008 2007 2006 ------------------------------------------------------------------------- Financial ($000s, except as noted) Oil revenue 110,253 61,289 31,586 Net operating income 51,141 31,956 13,111 Net loss 1,587 1,134 869 Basic and diluted loss per share 0.009 0.008 0.007 Cash provided by operations 49,032 22,319 8,991 Additions to property, plant and equipment 78,378 45,810 37,561 Total assets 214,675 204,295 70,740 Bank loans 28,125 30,805 6,772 Other long-term liabilities 34,404 15,577 4,260 Shareholders' equity 122,358 139,036 115,170 Operating Average production (bopd) 5,875 4,724 3,392 Average price ($/barrel) 51.27 35.54 25.51 Netback ($/barrel) 23.78 18.53 10.59 (x) Excludes results from discontinued US operations.
During the year, Bankers significantly increased its revenue, net operating income and cash provided by operations through well reactivations and commencement of the drilling program in Albania. The active well count in Albania increased to 213 at the end of 2008 from 164 in 2007 and 122 in 2006. Since the second quarter of 2008, the Company drilled and completed twelve vertical wells in addition to the country's first horizontal well.
In Albania, the average oil price increased to $51.27 per barrel from $35.54 per barrel in 2007 and $25.51 per barrel in 2006. The increase in 2008 was primarily related to the overall higher commodity prices, which translated into higher year-over-year netbacks. The 2008 netback improved to $23.78 per barrel from $18.53 per barrel in 2007 and $10.59 per barrel in 2006. On average, the oil price received by the Company represented approximately 53% of the Brent oil price in 2008 as compared to 51% in 2007.
Consolidated capital expenditures increased to $78.4 million in 2008 from $45.8 million in 2007 and $37.6 million in 2006.
Shareholders' equity decreased to $122.5 million in 2008 from $139.0 million in 2007 and $115.2 million in 2006. The reduction in shareholders' equity from 2007 was primarily a result of the spin off of the U.S. operations and assets in July 2008.
Highlights
Bankers accomplished several key achievements during 2008:
- Average production increased 24% to 5,875 bopd from 4,724 bopd in
2007. Exit production at year-end 2008 was 6,960 bopd as compared to
5,337 bopd at year-end 2007.
- Revenue increased to $110.3 million from $61.3 million a year ago, an
increase of 80%.
- Net operating income improved 60% to $51.1 million from $32.0 million
in 2007.
- Completed a non-brokered private placement, issuing an aggregate of
22,222,222 common shares at CAD$2.70 per share, resulting in net
proceeds of $58.3 million.
- Proved and probable reserves in Albania increased by 22% to
180 million barrels from 147 million barrels at December 31, 2007.
The corresponding net present value (NPV) after tax (discounted at
10%) increased by 40% to $1 billion from $720 million.
- Acquired a 100% working interest in the Kucova oilfield in Albania.
An independent evaluation of the Kucova oilfield estimates Bankers'
share of reserves to be 10.1 million barrels of proved plus probable
reserves and 35.5 million barrels of proved, probable and possible
reserves.
- Completed a plan of arrangement whereby all of the U.S. operations
and assets were split into a new independently managed company, BNK
Petroleum Inc. (BKX). BKX commenced trading on the Toronto Stock
Exchange on July 10, 2008 (symbol: BKX) and all future activities
related to BKX are reported separately.
- Commenced a new drilling program during the second quarter, leading
to the successful drilling of twelve vertical oil wells and one
horizontal oil well. Overall production levels from these new wells
are in line with the forecast.
- Cash provided from operations increased to $49 million, a 120%
increase from $22 million in 2007.
- Bankers exited 2008 with an overall cash position of $20.1 million
and $28.1 million of current and long term debt; the working capital
deficit of $7.4 million includes a $17.5 million revolving credit
facility that is renewed annually.
GROWTH STRATEGY
Bankers' strategy is focused on petroleum assets that have long-life reserves with production growth potential. Employing its knowledge base and technical expertise, the Company is working to optimize its existing assets from the application of primary, secondary and enhanced oil recovery (EOR) extraction technologies, creating long-term value for shareholders. This will be accomplished through the attainment of its main objectives: increasing production, reserves, cash provided by operations and net asset value.
Bankers' strategic priorities are to:
- Increase reserves and production;
- Maintain a strong balance sheet by controlling debt and managing
capital expenditures;
- Control costs through efficient management of operations;
- Pursue new and proven technology applications to improve operations
and assist exploration endeavours;
- Explore undeveloped acreage to identify and create development
opportunities;
- Maintain a strong focus on employee, contractor and community health
and safety; and
- Manage environmental and social performance to minimize negative
ecological impacts and ensure continued stakeholder support.
In pursuing the long-term growth strategy, Bankers is primarily focused on accessing the heavy oil upside from its Albanian assets, which includes the effective implementation of the Patos Marinza development plan as well as applying EOR and secondary extraction techniques to increase the field's recoverable reserves.
In addition, the Company's strategy involves identifying and acquiring other potential heavy oil opportunities in Albania to increase overall value. During the year, Bankers acquired a 100% interest in a private company which holds the rights to the Kucova oilfield in Albania, having approximately 300 million barrels of original-oil-in-place.
With recent decline in commodity prices, Bankers has adjusted its capital programs in 2009 with an objective to remain self funding from cash provided by operations, cash on hand and available credit facilities. Strategic allocation of the work program and budget is designated to provide additional recoverable reserves at the Patos Marinza and Kucova oilfields and still achieve an appropriate growth in production.
Key Performance Indicators
Key performance indicators relate to those factors that Bankers can directly affect, and are indicators of the Company's ability to provide long-term value to its shareholders. They include optimizing the cost of operations over time and improving exploration and development performance and operations through technology and best practices. Key measurements include operating costs, production volumes and safety performance. These key performance indicators are continuously reviewed and monitored.
In addition, strengthening relationships with employees, governments, communities and other stakeholders are important aspects of the business for Bankers. The effective management of these relationships allows the Company to tap into new growth opportunities and efficiently develop operations for the future.
CAPABILITY TO DELIVER RESULTS
Activity in the oil industry is subject to a range of external factors that are difficult to actively manage, including commodity prices, resource demand, regulator and environmental regulations and climate conditions. Bankers gives significant consideration to these factors and backs-up its strategy by employing and positioning necessary resources to deliver on its goals and commitment to increase value for shareholders. The Company focuses its capital on opportunities that provide the potential for the best returns. Comprehensive insurance policies are in place to help safeguard its assets, operations and employees. Relationships with stakeholders and key partners are carefully cultivated to assist in the Company's future development and growth. The experience of management and its technical team ensure that the Company can fulfill its commitment to deliver maximum value to its shareholders.
INDUSTRY & ECONOMIC FACTORS
Commodity price and foreign exchange benchmarks for the past two years are as follows:
2008 2007 ------------------------------------------------------------------------- Brent average oil price ($/barrel) 97.02 69.18 U.S./Canadian dollar year-end exchange rate 1.2246 0.9913 U.S./Canadian dollar average exchange rate 1.0671 1.0740
World crude oil prices have fluctuated significantly in 2008, from over $140 per barrel in July to less than $40 per barrel in December. The sharp decrease was a direct result of the economic downturn and the reduced global demand for oil.
Bankers sells its crude oil domestically to ARMO and internationally to two Italian refineries. Both the domestic and international selling prices are based on the Brent oil price. For every $1.00 per barrel change in Brent crude oil during 2008, the Company's revenues were impacted by approximately $1.2 million on an annualized basis.
The depreciation of the Canadian dollar against its U.S. counterpart continued during the second half of 2008. This reflected the impact of the weak Canadian economy, along with low commodity prices.
The fluctuations impact the Canadian dollar denominated short-term investments. The decrease of the Canadian dollar after the February equity financing was largely responsible for a foreign exchange loss of $4.6 million in 2008.
Significant Developments in 2008
There were several key events that occurred during the year that impacted Bankers' future direction. These events included the spin out of U.S. operations into a new independent entity, acquisition of 100% working interest in the Kucova oil field in Albania and the commencement of drilling operations in the Patos Marinza oilfield.
On July 2, 2008, Bankers completed a plan of arrangement wherein all of the U.S. operations and assets were split into a new independent company, BNK Petroleum Inc. (BKX). BKX commenced trading on the Toronto Stock Exchange on July 10, 2008 (symbol: BKX). All subsequent activities related to BKX are reported separately and all historical information herein is referred to as Discontinued Operations.
In Albania, Bankers acquired a 100% working interest in the Kucova oil field. An independent evaluation of the Kucova oilfield estimates Bankers' share of reserves to be 10.1 million barrels of proved plus probable reserves and 35.5 million barrels of proved, probable and possible reserves.
The proved and probable reserves in Albania increased by 22% to 180 million barrels from 147 million barrels. The corresponding NPV after tax (discounted at 10%) increased by 40% to $1 billion from $720 million.
Bankers commenced drilling operations in the Patos Marinza oilfield in June 2008, and as of December 31, 2008, a total of twelve vertical oil wells and one horizontal oil well were successfully drilled with production levels inline with forecast.
Bankers signed an agreement with the developers of the Port of Vlore oil export terminal for the storage and handling of its oil in a 13,000 cubic metre Company-dedicated oil tank. The storage facility will improve the Company's export operations and allow for larger oil liftings when the terminal is ready to receive larger vessels, expected in mid-2009.
QUARTERLY SUMMARY
Below is a summary of Bankers' performance over the last eight quarters.
2008
------------------------------------------------------
($000s, except
as noted) First Quarter Second Quarter Third Quarter
-------------------------------------------------------------------------
$/bbl $/bbl $/bbl
-------------------------------------------------------------------------
Average production
(bopd) 5,218 5,826 5,880
-------------------------------------------------------------------------
Oil revenue 24,676 51.96 34,157 64.36 33,543 62.08
Royalties 4,298 9.05 6,601 12.43 7,790 14.40
Sales and
transportation 1,664 3.50 1,727 3.27 1,932 3.57
Operating expenses 5,706 12.02 7,693 14.03 7,503 13.32
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Net operating
income 13,008 27.39 18,136 34.63 16,318 30.79
------------------------------------------------------
------------------------------------------------------
2008
------------------------------------
($000s, except
as noted) Fourth Quarter Year
-------------------------------------------------------
$/bbl $/bbl
-------------------------------------------------------
Average production
(bopd) 6,561 5,875
-------------------------------------------------------
Oil revenue 17,877 29.63 110,253 51.27
Royalties 4,163 6.69 22,852 10.63
Sales and
transportation 2,192 3.63 7,515 3.49
Operating expenses 7,843 13.54 28,745 13.37
------------------------------------
Net operating
income 3,679 5.77 51,141 23.78
------------------------------------
------------------------------------
2007
------------------------------------------------------
($000s, except
as noted) First Quarter Second Quarter Third Quarter
-------------------------------------------------------------------------
$/bbl $/bbl $/bbl
-------------------------------------------------------------------------
Average production
(bopd) 4,388 4,314 4,753
-------------------------------------------------------------------------
Oil revenue 10,739 27.19 12,913 32.89 16,239 37.14
Royalties 1,440 3.65 1,682 4.28 1,922 4.40
Sales and
transportation 775 1.96 1,007 2.56 1,068 2.44
Operating expenses 4,014 10.16 4,048 9.91 4,535 10.37
------------------------------------------------------
Net operating
income 4,510 11.42 6,176 16.14 8,714 19.93
------------------------------------------------------
------------------------------------------------------
2007
------------------------------------
($000s, except
as noted) Fourth Quarter Year
-------------------------------------------------------
$/bbl $/bbl
-------------------------------------------------------
Average production
(bopd) 5,429 4,724
-------------------------------------------------------
Oil revenue 21,398 42.84 61,289 35.54
Royalties 2,207 4.42 7,251 4.21
Sales and
transportation 1,332 2.67 4,182 2.43
Operating expenses 5,303 10.93 17,900 10.37
------------------------------------
Net operating
income 12,556 24.82 31,956 18.53
------------------------------------
------------------------------------
2008
-------------------------------------------------
($000s, except First Second Third Fourth
as noted) Quarter Quarter Quarter Quarter Year
-------------------------------------------------
Financial
General and
administrative 2,091 2,034 2,157 1,089 7,371
Cash provided by
continuing operations 10,852 15,546 13,124 9,510 49,032
Net income (loss) 539 1,005 4,876 (8,007) (1,587)
Basic and diluted
earnings (loss) 0.027/
per share(1) 0.003 0.006 0.026 (0.044) (0.009)
Total assets 272,469 315,631 216,978 214,675 214,675
Capital expenditures 13,764 17,101 25,502 22,011 78,378
Bank loans 30,218 29,004 27,583 28,125 28,125
-------------------------------------------------
2007
-------------------------------------------------
($000s, except First Second Third Fourth
as noted) Quarter Quarter Quarter Quarter Year
-------------------------------------------------
Financial
General and
administrative 1,249 1,699 1,779 2,667 7,394
Cash provided by
continuing operations 3,894 5,930 6,549 5,946 22,319
Net income (loss) (477) 897 572 (2,126) (1,134)
Basic and diluted
earnings (loss)
per share(1) (0.003) 0.006 0.004 (0.014) (0.008)
Total assets 168,005 175,550 185,652 204,295 204,295
Capital expenditures 9,991 14,396 13,066 8,357 45,810
Bank loans 15,987 19,471 25,967 30,850 30,850
-------------------------------------------------
(1) On July 30, 2008, the Company completed the consolidation of its
shares on the basis of one (1) new post-consolidation share for each
three (3) pre-consolidation shares. The computations of basic and
diluted earnings (loss) per share for all the periods presented are
based on the new number of shares after giving effect to the share
consolidation.
DISCUSSION OF OPERATING RESULTS
Production, Revenue and Netback
2008 2007 %
-------------------------------------------------------------------------
Average production (bopd) 5,875 4,724 24
Oil revenue ($000s) 110,253 61,289 80
Netback ($/barrel)
Average price 51.27 35.54 44
Royalties 10.63 4.21 152
Sales and transportation 3.49 2.43 44
Operating 13.37 10.37 29
Netback 23.78 18.53 28
During 2008, production continued to increase due to the continued well reactivation program and the commencement of new drilling operations. As of December 2008, the total active well count was 212 compared to 164 in 2007. During the year, the Company took over 136 total active wells from Albpetrol; 57 wells were successful and added to the producing well count by year-end; 79 wells were added to the non-producing well count from which 31 pending major workovers and 15 wells are waiting on reactivation; 24 wells were added to the suspended well count pending further review (includes failures due to wellbore conditions and high water cut production); and 3 service wells were added for water disposal and 6 well leases were used for different aspects of field operations. Total wells taken over in the field amount to 482 by year-end 2008. Average production increased 24% to 5,875 bopd from 4,724 bopd for the preceding year. The exit production rate was 6,960 bopd at 2008 year-end.
During the year, Bankers renegotiated its domestic contract with the Albanian Refining and Marketing Organization Sh.a (ARMO), which compares favourably to the previous contract and is more competitive with the export pricing. Bankers sold 49% of its crude domestically to ARMO at an average price of $47.74 per barrel during the year compared to $27.97 per barrel in 2007. The Company exported the remaining crude to two Italian refineries under export sales contracts at an average price of $54.88 per barrel.
Even though commodity prices commenced a retrenchment starting in the third quarter and continued throughout the reminder of the year, the average oil price for the year was $51.27 per barrel, up 44% from $35.54 per barrel for the preceding year. This increase was largely due to the sharp increases in commodity prices in the first half of the year. Oil revenue for the year was $110.3 million, an increase of 80% over $61.3 million for the preceding year.
Production reached a record average of 6,561 bopd during fourth quarter of 2008 compared to 5,880 bopd during the preceding quarter and 5,429 bopd during the same period in 2007. Lower commodity prices were the primary reasons for the reduction in oil revenue during the fourth quarter of 2008 compared to the 2008 third quarter and the same period in 2007. The Company received an average of $29.63 per barrel during the fourth quarter compared to $62.08 per barrel in the third quarter and $42.84 per barrel over the same period in 2007. The Company exported 48% of its crude oil during this quarter compared to 52% during the preceding quarter and 58% during the same period in 2007.
The Company's netback suffered a major reduction due to the sharp decline in oil prices during the fourth quarter. Netback was $5.77 per barrel compared to $30.79 per barrel for the preceding quarter and $24.82 per barrel for the fourth quarter in 2007.
Royalties
Royalties in Albania are calculated pursuant to the Petroleum Agreement with Albpetrol, and consist of Albpetrol's pre-existing production, a gross overriding royalty on new production and a government royalty. In 2008, royalties increased to $10.63 per barrel (21% of oil revenue) from $4.21 per barrel (12%) for the corresponding period in 2007. Royalties increased primarily in relation to implementation of a higher royalty rate, effective April 1, 2008, and higher domestic sales prices. Bankers had previously proposed a 9% increase in the gross overriding royalty during the cost recovery period in exchange for expanded development opportunities of the Patos Marinza oilfield, and effective August 12, 2008 the Albanian Parliament approved an amendment to the hydrocarbon fiscal system by establishing a 10% royalty tax. The Petroleum and License Agreements have been amended to effectively offset the royalty tax against future income taxes.
Royalties for the quarter were $6.69 per barrel (23% of oil revenue) compared to $14.40 per barrel (23%) during the third quarter of 2008 and $4.42 per barrel (10%) for the same period in 2007. The increase in royalties compared to the same period last year was mainly due to implementation of a new royalty structure that became effective at the beginning of the second quarter of 2008.
Operating Expenses
Operating expenses for the year increased to $13.37 per barrel from $10.37 per barrel for the same period in 2007, mainly due to higher average fuel/diluent costs, as well as higher personnel, repair and maintenance costs. Similarly, the sales and transportation costs for the year increased to $3.49 per barrel from $2.43 per barrel for 2007.
Operating expenses during the fourth quarter were $13.54 per barrel, up from $13.32 per barrel during the third quarter and $10.93 per barrel during the same period in 2007. This year-over-year increase was due to higher subcontracting, personnel, workover and fuel costs. Sales and transportation expenses increased modestly by 2% to $3.63 per barrel for the fourth quarter in 2008 compared to $3.57 per barrel during the preceding quarter and $2.67 per barrel a year ago. The increase primarily reflects the higher fuel and trucking costs.
General and Administrative Expenses
General and administrative expenses (G&A) for the year were $7.4 million, net of capitalization, consistent with the amount in 2007. On a per barrel basis, the 2008 G&A costs represented $3.43 per barrel, a 20% reduction from $4.29 per barrel in 2007, as a result of the 24% production increase.
During the year, the Company capitalized $3.4 million of G&A compared to $2.0 million for the preceding year. These expenses were directly related to acquisition, exploration and development activities.
Non-cash stock-based compensation expense pertaining to stock options vested and/or granted to officers, directors, employees and service providers were $8.8 million (2007 - $3.1 million). Of this amount, $7.3 million (2007 - $2.9 million) was charged to earnings and $1.5 million (2007 - $171,000) was capitalized.
G&A expenses for the fourth quarter of 2008 were $1.1 million compared to $2.2 million in the preceding quarter and $2.7 million for the same period in 2007. The sharp reduction was mainly due to the decline in the Canadian dollar against the U.S. dollar and a reduction of personnel costs.
Depletion, Depreciation and Accretion
Depletion, depreciation and accretion expenses for the year were $13.7 million compared to $8.9 million for 2007. The increase in depletion, depreciation and accretion expenses reflects higher production in Albania and an increase in depletable assets. The Company's independent reserve evaluation prepared in accordance with the National Instrument NI 51-101 assessed proved gross reserves of 67.0 million barrels at December 31, 2008, compared to 53.4 million barrels established in 2007.
Depletion, depreciation and accretion for the quarter ended December 31, 2008 were $4.3 million, compared to $3.3 million for the preceding quarter and $3.0 million for the same period in 2007. The increase in depletion, depreciation and accretion reflects the higher depletion base and the increase in production during the quarter. Depletion expenses represented $6.67 per barrel for the quarter compared to $5.68 per barrel and $5.89 per barrel for the preceding quarter and the same period in 2007 respectively.
Future Income Tax Expense
Future income tax liabilities result from the temporary differences between the carrying value and tax values of Albanian assets and liabilities. As of December 31, 2008, the net book value of the Albania property, plant and equipment exceeded their tax value by $63.0 million, compared to $26.8 million on December 31, 2007. Applying a tax rate of 50%, the Company recorded a $31.5 million future income tax liability, compared to $13.4 million at the end of 2007. The Company recorded a future income tax expense of $80,000 for the quarter compared to $4.2 million for the preceding quarter and $4.6 million for the same period in 2007. The reduction was mainly due to the reduction in earnings.
Bankers is presently not required to pay cash taxes in any jurisdiction. The Company's cost recovery pool in Albania is $88.9 million. In Canada, the Company has non-capital losses of approximately $10.5 million, the benefit of which has not been recognized in the financial statements.
Net loss and Cash Provided by Continuing Operations
The Company recorded a net loss of $1.6 million ($0.009 per share) during the year ended December 31, 2008 and a net loss of $1.1 million ($0.008 per share) for the year ended December 31, 2007.
Cash provided by continuing operating activities amounted to $49.0 million for the year ended December 31, 2008 compared to $22.3 million in 2007, an increase of 120%. The increase in cash flow from continuing operating activities is mainly due to production increases and higher average commodity prices obtained during the year.
Cash provided by operating activities in the fourth quarter was $9.5 million as compared to $13.1 million during the third quarter and $5.9 million for the fourth quarter of 2007. The net loss for the quarter was $8.0 million compared to net earnings of $4.9 million for the third quarter and a net loss of $2.1 million for the same period in 2007.
OIL RESERVES
Annually, the Company obtains independent reservoir evaluations of its Albanian properties by RPS Energy Canada Ltd. (Patos Marinza oilfield) and by DeGolyer and MacNaughton Canada Ltd. (Kucova oilfield). At December 31, 2008, the reserves have increased in all three categories (proved, probable and possible), along with the corresponding valuations, as shown below. On a Proved plus Probable basis, the 2008 finding and development costs for the Albanian properties represented $5.55 per barrel, inclusive of the 2008 expenditures and change in future capital.
Gross Oil Reserves (Mbbls) - using Forecast Prices
----------------------------- -------------------
2008 2007
----------------------------- -------------------
Patos Total Total
Marinza Kucova Albania Albania(x) %
----------------------------------------------------- -------------------
Proved
Developed Producing 21,314 - 21,314 13,986 52
Developed
Non-Producing - - - - -
Undeveloped 45,684 2,400 48,084 36,821 30
----------------------------- -------------------
Total Proved 66,998 2,400 69,398 50,807 36
Probable 102,910 7,683 110,593 96,248 15
----------------------------- -------------------
Total Proved Plus
Probable 169,908 10,083 179,991 147,055 22
Possible 105,451 25,443 130,894 93,505 40
----------------------------- -------------------
Total Proved,
Probable & Possible 275,359 35,526 310,885 240,560 29
----------------------------------------------------- -------------------
Net Present Value at 10% - After Tax Using Forecast Prices ($millions)
----------------------------- -------------------
2008 2007
----------------------------- -------------------
Patos Total Total
Marinza Kucova Albania Albania(x) %
----------------------------------------------------- -------------------
Proved
Developed Producing 133.1 - 133.1 93.4 43
Developed
Non-Producing - - - - -
Undeveloped 130.3 16.4 146.7 137.2 7
----------------------------- -------------------
Total Proved 263.4 16.4 279.8 230.6 21
Probable 624.7 102.3 727.0 489.5 49
----------------------------- -------------------
Total Proved Plus
Probable 888.1 118.7 1,006.8 720.1 40
Possible 559.5 156.9 716.4 289.1 148
----------------------------- -------------------
Total Proved,
Probable & Possible 1,447.6 275.6 1,723.2 1,009.2 71
----------------------------------------------------- -------------------
(x) All 2007 reserves pertain to Patos Marinza
In the Patos Marinza oilfield, the original-oil-in-place resource estimate increased 140% to 4.7 billion barrels. The reserves growth is primarily attributable to increased resource levels, improved well performance and the Company's 2008 vertical and horizontal development drilling success. This is reflected in the upgrade of 2P and 3P reserves into 1P and 2P reserves category, respectively, and the expansion of the 3P reserves. All of Patos Marinza's 2008 reserves estimates are from primary recovery methods.
The Company acquired the Kucova asset during 2008 and the original-oil-in-place resource estimate is 300 million barrels. This property is currently in the evaluation stage; there was no Company production from the Kucova field in 2008 and only minor field activities were performed. Bankers expects to commence activity in this area in 2009 utilizing a variety of extraction techniques that will lead to creation of a development plan.
CAPITAL EXPENDITURES
($000) 2008 2007
-------------------------------------------------------------------------
Well re-activations 35,344 32,553
Drilling programs 20,472 -
Property acquisitions 5,617 -
Central treatment facilities 416 9,917
Port facilities 2,458 -
Base program 6,204 6,049
Inventory change 7,867 (2,709)
------------------------
78,378 45,810
------------------------
------------------------
During the year, Bankers spent $35.3 million on well re-activations compared to $32.6 million in previous year. The increase in well-reactivation was a direct result of increase in wells taken over from Albpetrol. In 2008, the Company commenced its drilling programs and a total of twelve vertical oil wells and one horizontal oil well were drilled during the year. Property acquisition increased to $5.6 million in 2008 primarily as a result of purchasing 100% interest in the Kucova oilfield. During the year, $2.5 million was spent on the oil export terminal facilities. Included in the year-end property, plant and equipment amounts are casing, tubing and capital equipment inventories of $16.9 million at December 31, 2008 (2007 - $9.0 million) to be used for future drilling and re-activation programs in Albania.
During the fourth quarter of 2008, Bankers incurred $20.0 million on capital expenditures; $9.4 million on drilling operations, $5.8 million on well reactivations and $1.2 million on export infrastructure. The balance of the expenditures was incurred on miscellaneous expenditures and capitalized G&A. By comparison, in the 2007 fourth quarter, the Company spent $8.4 million on capital expenditures; $7.6 million on well reactivations and $787,000 on central treatment facilities.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2008, Bankers had a working capital deficiency of $7.4 million (including cash and cash equivalent and a short-term deposit totalling $18.6 million) and a long-term bank loan of $6.9 million. The Company's credit facility with a European financial institution was $28.1 million on December 31, 2008. This amount includes a revolving operating loan of $16.0 million, a $1.5 million bridge facility and a three-year term loan of $10.6 million. Repayments of $3.8 million were made on the term loan during 2008.
As of December 31, 2007, the Company had a working capital deficiency of $9.6 million and a long-term bank loan of $11.3 million.
Subsequent to year-end, the Company received approval for an $8.0 million increase to its existing credit facility. The existing $16 million operating loan facility will be increased by $4.0 million and a new $4.0 million five-year term facility will be available. The operating loan is renewable annually and may be extended for a further twelve month period up to four times upon request by the Company and acceptance by the lender.
On February 25, 2009, the Company announced it has entered into negotiations with two international banks for provision of a reserve-based long-term financing of up to $110.0 million to supplement the Company's existing $35.0 million facility. This facility is expected to be in place during the second quarter of 2009 subject to ongoing discussions, completion of all required documents for approval, necessary regulatory and stock exchange approvals and receipt of final approval from the banks and the Company.
The Company's approach to managing liquidity is to ensure a balance between capital expenditure requirements and, cash provided by operations, available credit facilities and working capital. In recognition that significant changes in expected commodity prices could impact cash provided by operations, capital expenditures for 2009 will be reduced accordingly.
In March 2008, the Company completed a non-brokered private placement, issuing an aggregate of 22,222,222 common shares at CAD$2.70 per share, resulting in net proceeds of $58.3 million. During 2008, Bankers received proceeds of $11.0 million from the exercise of an aggregate of 6,179,624 options and $8.9 million from the exercise of an aggregate of 3,301,838 warrants.
With the separation of the U.S. operations into a new independent entity (BKX) in July 2008, Bankers no longer has obligations to fund any future capital expenditures for those assets. Bankers had provided a $23 million guarantee to a U.S. bank as security for a new credit facility for BKX, prior to the spin-out. The guarantee is secured by an interest-bearing term loan agreement, and will be reduced from future BKX equity issuances and credit facility increases. On August 10, 2008, $10 million was repaid to Bankers, reducing the note to $13 million at December 31, 2008. The Company has credit risk with respect to this note receivable and regularly monitors the operations and financial condition of the borrower.
On July 30, 2008, the Company completed the consolidation of its shares on the basis of one (1) new post-consolidation share for each three (3) pre-consolidation shares. The exercise price and number of stock options and common share purchase warrants were adjusted proportionately.
There were approximately 183 million shares outstanding as at December 31, 2008 and March 18, 2009. In addition, the Company had approximately 12 million stock options and 10 million warrants outstanding as of December 31, 2008. On March 18, 2009, Bankers has 11 million stock options and 10 million warrants outstanding. In conjunction with the $110.0 million credit facility announced on February 25, 2009, the Company has reserved for issuance 16 million warrants subject to completion of the loan documentation. When issued, each warrant will entitle the holder to purchase one common share of the Company at a price of CAD$1.50 subject to certain conditions regarding Brent oil price.
Officers and executives of the Company represent approximately ten percent ownership in the Company on a fully diluted basis. This creates an alignment with shareholders and a team that is dedicated to activities that support future value creation.
In Albania, the Company considers any amounts greater than 60 days as past due. Of the total receivables of $17 million in Albania, approximately $14 million is due from one domestic customer of which $4 million is considered past due. Corresponding to these receivables, the Company has royalty obligations of $10 million recorded as accounts payable and accrued liabilities. These royalty payments will be made when the related receivables are collected. In an effort to collect these receivables, the Company has regular dialogue with this customer; payments totalling $1.5 million have been received subsequent to year-end. The Albanian government continues to own 15% of this customer; the remainder was privatized for $167 million in December 2008. The two refineries owned by this customer are the only ones in Albania and are strategically important to the country. Bankers, as the largest supplier of crude oil to these refineries, continues to deliver some oil to this customer and maintains a good working relationship with them and the Albanian government. Bankers' management has confidence that these amounts will be collected and has not recorded a loss provision. In order to reduce reliance on this customer, Bankers expects to expand export deliveries, especially by way of the expanded shipping terminal, expected to be operational in mid-2009.
Plan of Development
Bankers has provided an Addendum to the Plan of Development for the Patos Marinza oilfield. The Plan of Development, which was approved in 2006, allows the Company to take-over the remaining wells in the field on a defined basis and to produce and sell oil under Albpetrol's existing license for a period of 25 years with an option to extend at the Company's election for further five year increment. The annual work program and budget has been submitted to Albpetrol and AKBM which includes the nature and the amount of capital expenditures to be incurred during that year. Significant deviations in this annual program from the Plan of Development will be subject to AKBN approval.
An addendum to the Plan of Development for the Patos Marinza field, maintaining the same work program and level of expenditures but over an extended period to reflect lower commodity prices, was submitted by the Company and approved by the national oil company "Albpetrol" and is currently awaiting Government approval.
Commitments
The Company has long-term lease commitments in Canada and Albania. The minimum lease payments for the next four years are $716,000 as follows:
($000) Canada Albania Total
-------------------------------------------------------------------------
2009 141 232 373
2010 141 55 196
2011 141 - 141
2012 6 - 6
---------------------------------------
429 287 716
---------------------------------------
---------------------------------------
The Company has a $10.63 million term loan with a European financial
institution that is repayable in equal monthly instalments of $312,500 ending
on November 30, 2011. Of the amount outstanding, $3.75 million is classified
as current and $6.88 million as long-term. Principal repayments of the term
loan over the next three years are as follows:
($000)
-------------------------------------------------------------------------
2009 3,750
2010 3,750
2011 3,125
------------
10,625
------------
------------
The Company is committed to contributing $730,000 ((euro)500,000) to a dedicated oil export terminal facility upon service commencement in the second half of 2009, and will pay a throughput rate when the facility is operational.
Quarterly Variability
Fluctuations in quarterly results are due to a number of factors, some of which are not within the Company's control such as seasonality and commodity prices.
- Seasonality of winter operating conditions combined with the timing
of transfer of wells from Albpetrol results in production increases
that are typically higher in the second and third quarters. As new
wells come on stream, there is a build-up period in production,
higher sand production and higher well servicing costs, which is
typical for heavy oil wells in the first year of production. In
addition, production levels can be affected by water disposal
constraints, mechanical wellbore and isolation failures, increased
water production coming from shallower and deeper zones, and a
shortage of rig workover capacity and specialised well servicing
equipment.
- The increase in royalties is related to higher oil prices and the
greater number of wells being taken over from Albpetrol, which
results in higher pre-existing production.
- Fluctuations of operating expenses is part of a continuing trend that
results from operating efficiencies gained through greater experience
in field operations and economies of scale as the proportionate share
of fixed operating expenses declines with production increases.
CRITICAL ACCOUNTING ESTIMATES
The Company's financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). Significant accounting policies are disclosed in Note 2 to the Audited Consolidated Financial Statements. Preparation of financial statements in accordance with GAAP requires that management make estimates that affect the reported amount of assets, liabilities, revenues and expenses. The estimates used in applying these critical accounting policies for property, plant and equipment are as follows:
Capitalized Costs
The Company follows the full cost method of accounting for oil and gas operations whereby all costs associated with the exploration for and development of oil and gas reserves are capitalized on a country-by-country basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, production equipment, overhead charges directly related to acquisition, exploration and development activities and asset retirement costs.
Depletion and Depreciation
Capitalized costs within each country are depleted and depreciated on the unit-of-production method based on the estimated gross reserves determined by independent petroleum engineers. Depletion and depreciation is calculated using the capitalized costs, plus the estimated future costs to be incurred in developing proved reserves, net of estimated salvage value. Costs of acquiring and evaluating unproved properties are initially excluded from the depletion and depreciation calculation until it is determined whether or not proved reserves can be assigned to such properties.
Proceeds from the sale of oil properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion and depreciation by more than 20 per cent in a particular country cost centre, in which case a gain or loss on disposal is recorded.
Office and computer equipment are depreciated on the declining balance method at rates of 20 to 30 percent.
Ceiling Test
The Company uses Canadian standards for full cost accounting and for the ceiling test calculation pertaining to the measurement of impairment of petroleum properties. In applying the full cost method, the Company evaluates petroleum assets to determine that the carrying amount in each cost centre is recoverable and does not exceed the fair value of the properties in the cost centre. The carrying amounts are assessed to be recoverable when the sum of the undiscounted cash flows expected from the production of proved reserves, and the lower of cost and the market of unproved properties exceeds the carrying amount of the cost centre. When the carrying amount is not recoverable, an impairment loss is recognized to the extent the carrying amount of the cost centre exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties of the cost centre.
Asset Retirement Obligations
The fair value of estimated asset retirement obligations is capitalized to property, plant and equipment when the liability is incurred. Asset retirement obligations include those legal obligations where the Company will be required to retire tangible long-lived assets such as producing well sites and facilities. Asset retirement costs for oil and gas properties are amortized as part of depletion and depreciation using the unit-of-production method. Increases in the asset retirement obligations resulting from the passage of time are recorded as accretion expense. Actual remediation expenditures incurred are charged against the accumulated obligation.
RELATED PARTY TRANSACTIONS
The Company has a note receivable from BKX in an amount of $13 million. BKX is considered a related party as BKX and the Company have two common directors. The above transaction is considered to be in the normal course of business and has been measured at the exchange amount being the amounts agreed to by both the parties.
The note, which is due on October 2012, accrues interest at LIBOR plus 5.5% and is secured by a floating charge debenture and a general security agreement. At December 31, 2008, no principal or interest amounts were due. The Company is entitled to receive up to 50% of any future equity financing by BKX and 90% of any increase in BKX's borrowing base as repayment of this note. The Company has no further obligation to increase the note. In December 2008, the Company waived its right to any proceeds from BKX's $10 million non-core property disposition in exchange for a 2% increase in the note interest rate.
RESTRUCTURING AND DISCONTINUED OPERATIONS
Pursuant to shareholders' approval at the Annual and Special General Meeting on June 27, 2008, the Company completed its plan of arrangement, effective July 1, 2008 which resulted in all of the Company's US operations and assets being transferred into a new, independent company. BKX commenced trading on the Toronto Stock Exchange (symbol: BKX) on July 10, 2008. This allows Bankers to focus on development of heavy oil properties in Albania, its core business. Accordingly, the historical operations of BKX have now been classified as discontinued operations. This transaction is considered a distribution to shareholders. Restructuring costs of $2.8 million, pertaining to the completion of the above transaction, have been charged to retained earnings (deficit). Details were as follows:
- Shareholders of the Company received shares of BKX on a proportional
basis to their interest in Bankers: one (1) share in BKX for every
ten (10) common shares held in Bankers.
The exercise price for Company's outstanding common share purchase
warrants and stock options were reduced by approximately 13% to reflect the
valuation impact of the BKX spinout.
CHANGE IN ACCOUNTING POLICIES, INCLUDING INITIAL ADOPTION
Effective January 1, 2008, the Company adopted the following accounting
standards:
- Inventories (Section 3031) - the new standard replaces the previous
inventories standard and prescribes certain methods for valuing
inventories. The adoption of this standard had no material impact on
the Company's consolidated financial statements.
- Financial Instruments - Disclosures and Presentation
(Section 3862/3863) - the new standards require increased disclosures
regarding the Company's financial instruments, the risks associated
with these instruments and how the risks are managed. The required
disclosures are contained in Note 14 to the Company's consolidated
financial statements.
- Capital Disclosures (Section 1535) - the new standard requires the
Company to disclose its definition of capital and its objectives,
policies and processes for managing its capital structure. The
required disclosures are contained in Note 14 to the Company's
consolidated financial statements.
NEW ACCOUNTING STANDARDS
- Goodwill (Section 3064) - the new standard replaces Section 3062 and
will be effective January 1, 2009. This section applies to goodwill
subsequent to initial recognition and establishes standards for the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. This new standard is not expected to have a
material impact on Bankers' consolidated financial statements.
- Transition to International Financial Reporting Standards ("IFRS") -
In February 2008, the Canadian Accounting Standards Board confirmed
January 1, 2011 as the effective date for the requirement to report
under IFRS along with conversion of comparative 2010 periods. The
impact of IFRS on our results of operations and future financial
position is not reasonably determinable at this time. The Company has
supported staff training programs and has engaged external advisors
to plan the IFRS initiative, and are in the process of completing a
preliminary assessment of transitional requirements to identify
expected impacts on the Company. Regular reports on the IFRS
transition status will be made to Management and the Audit Committee.
- Business combinations - In December 2008, the CICA issued the new
accounting standard 1582, Business Combination replacing
Section 1581. This Section establishes principles and requirements
for accounting for business combinations. Significant changes include
determination of the purchase price based on the fair value of shares
exchanged at the market price on the acquisition or closing date. The
new guidance also requires that all acquisition related costs be
expensed as incurred, and contingent liabilities are to be measured
at fair value at acquisition date and re-measured to fair value at
each reporting period through earnings until settled. In addition,
negative goodwill is required to be recognized in earnings on the
acquisition date. The new Section will be applied prospectively
effective January 1, 2011.
INTERNAL CONTROLS
The Company's President and Chief Executive Officer (CEO) and Vice President, Finance and Chief Financial Officer (CFO) are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting as defined in NI 52-109.
Disclosure controls and procedures have been designed to ensure that information to be disclosed by the Company is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. The Company's CEO and CFO have evaluated the effectiveness of the disclosure controls and procedures as at December 31, 2008 and have concluded that they provide reasonable assurance that all material information relating to the Company is disclosed in a timely manner.
Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of the Company's financial reporting and compliance with generally accepted accounting principles. The CEO and CFO have evaluated the Company's internal controls over financial reporting as at December 31, 2008 based on the framework in "Internal Control Over Financial Reporting - Guidance for Smaller Public Companies" issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and have concluded they are designed and operating effectively to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP. During the year ended December 31, 2008, there have been no changes to the Company's internal controls over financial reporting that have materially, or are reasonably likely to, materially affect the internal controls over financial reporting.
Because of their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements, errors or fraud. Control systems, no matter how well conceived or operated, can provide only reasonable, not absolute assurance that the objectives of the control systems are met.
OUTLOOK
The capital spending reduction initiatives, equity financing completed in early 2008 and divesting of the US assets with no further capital spending requirements, kept our company in a good financial position and well positioned to re-initiate an expanded capital program when confidence returns to the energy sector and higher oil prices are realized.
The three-year strategic plan for the Patos Marinza oilfield provides significant potential for growth in production and reserves through primary, secondary and tertiary extraction techniques. The 2009 strategic allocation of the work program and budget is flexible by having multiple capital spending scenarios that are oil price sensitive and is designated to provide additional recoverable reserves at the Patos Marinza and Kucova oilfields and still achieve an appropriate growth in production. Current production is approximately 6,200 bopd, with another 500 to 600 bopd shut-in.
The Company's approach to managing liquidity is to ensure a balance between capital expenditure requirements and cash provided by operations, available credit facilities and working capital. With recent sharp declines in oil prices, Bankers has elected to slow down its capital expenditures program in 2009 with an objective to remain self funding from cash provided from operations, cash on hand and available credit facilities. The revised forecast exit production rate for 2009 is expected to be approximately 8,000 bopd. All necessary drilling and workover equipment remains available and on stand-by in Albania and will be re-deployed when favourable economic conditions are attained. The Company expects to increase its export deliveries by mid-2009 as a result of the commissioning of the new Port of Vlore oil export terminal that will provide increased storage capacity and facilitate larger vessels.
BANKERS PETROLEUM LTD.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31
(Expressed in thousands of U.S. dollars)
-------------------------------------------------------------------------
ASSETS
2008 2007
--------------------------
Current assets
Cash and cash equivalents (Note 13) $ 15,607 $ 2,599
Short-term deposit 3,000 -
Restricted cash (Note 3) 1,500 -
Investments (Note 4) 134 1,120
Accounts receivable 17,591 15,378
Crude oil inventory 1,588 985
Deposits and prepaid expenses 1,231 850
Assets of discontinued operations (Note 15) - 7,462
--------------------------
40,651 28,394
Note receivable (Note 5) 13,000 -
Property, plant and equipment (Note 6) 161,024 94,107
Property, plant and equipment of discontinued
operations (Note 15) - 81,794
--------------------------
$ 214,675 $ 204,295
--------------------------
--------------------------
LIABILITIES
Current liabilities
Operating loans (Note 7) $ 17,500 $ 15,805
Accounts payable and accrued liabilities 26,788 11,104
Current portion of term loan (Note 7) 3,750 3,750
Accounts payable and accrued liabilities of
discontinued operations (Note 15) - 7,340
--------------------------
48,038 37,999
Term loan (Note 7) 6,875 11,250
Asset retirement obligations (Note 8) 2,896 2,177
Future income tax liability (Note 11) 31,508 13,400
Asset retirement obligations of
discontinued operations (Note 15) - 433
SHAREHOLDERS' EQUITY
Share capital (Note 9) 121,907 136,513
Warrants (Note 9) 2,088 2,539
Contributed surplus (Note 9) 11,862 8,308
Deficit (10,499) (8,324)
--------------------------
125,358 139,036
--------------------------
$ 214,675 $ 204,295
--------------------------
--------------------------
Commitments (Note 12)
See accompanying notes to consolidated financial statements.
APPROVED BY THE BOARD
"Robert Cross" Director "Eric Brown" Director
-------------------- ------------------
BANKERS PETROLEUM LTD.
CONSOLIDATED STATEMENT OF OPERATIONS, COMPREHENSIVE LOSS AND DEFICIT
FOR THE YEARS ENDED DECEMBER 31
(Expressed in thousands of U.S dollars, except per share amounts)
-------------------------------------------------------------------------
2008 2007
--------------------------
Revenue
Oil revenue $ 110,253 $ 61,289
Royalties (22,852) (7,251)
Interest 1,501 403
--------------------------
88,902 54,441
--------------------------
Expenses
Operating 28,745 17,900
Sales and transportation 7,515 4,182
General and administrative 7,371 7,394
Interest and bank charges 1,105 666
Interest on term loan 1,148 1,244
Foreign exchange loss (gain) 4,573 (1,300)
Write down of investments (Note 4) 986 3,430
Stock-based compensation (Note 9) 7,283 2,882
Depletion, depreciation and accretion 13,655 8,903
--------------------------
72,381 45,301
--------------------------
Income from continuing operations before
income tax 16,521 9,140
Future income tax expense (Note 11) (18,108) (10,274)
--------------------------
Loss from continuing operations (1,587) (1,134)
Discontinued operations (Note 15) (188) (1,208)
--------------------------
Net loss and comprehensive loss for the year (1,775) (2,324)
Deficit, beginning of year (8,324) (5,982)
Discontinued operations (Note 15) 2,396 -
Restructuring costs (Note 15) (2,796) -
--------------------------
Deficit, end of year $ (10,499) $ (8,324)
--------------------------
--------------------------
Basic and diluted loss per share -
continuing operations $ (0.009) $ (0.008)
--------------------------
--------------------------
Basic and diluted loss per share -
discontinued operations $ (0.001) $ (0.008)
--------------------------
--------------------------
See accompanying notes to consolidated financial statements.
BANKERS PETROLEUM LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(Expressed in thousands of U.S dollars)
-------------------------------------------------------------------------
2008 2007
--------------------------
Cash provided by (used in):
Continuing operations:
Net loss from continuing operations $ (1,587) $ (1,134)
Items not involving cash:
Depletion, depreciation and accretion 13,655 8,903
Future income tax expense 18,108 10,274
Stock-based compensation 7,283 2,882
Unrealized foreign exchange loss (gain) 3,268 (322)
Write down of investments 986 3,430
Change in non-cash working capital (Note 13) 7,319 (1,714)
--------------------------
49,032 22,319
--------------------------
Cash provided by (used in) operating
activities of discontinued operations 10,470 (3,376)
--------------------------
Investing activities
Additions to property, plant and equipment (78,378) (45,810)
Additions to property, plant and equipment
of discontinued operations (25,465) (34,893)
Proceeds from sale of property, plant
and equipment of discontinued operations - 15,000
Increase in restricted cash (1,500) -
Change in non-cash working capital (Note 13) 5,169 (3,184)
--------------------------
(100,174) (68,887)
--------------------------
Financing activities
Issue of shares for cash 79,914 23,775
Share issue costs (1,490) (1,419)
Note receivable (13,000) -
Short-term deposit (3,000) -
Restructuring costs (2,796) -
Increase in operating loans 1,695 11,033
(Decrease) increase in term loan (4,375) 13,000
--------------------------
56,948 46,389
--------------------------
Foreign exchange (loss) gain on cash and cash
equivalents held in foreign currencies (3,268) 322
--------------------------
Increase (decrease) in cash and cash equivalents 13,008 (3,233)
Cash and cash equivalents, beginning of year 2,599 5,832
--------------------------
Cash and cash equivalents, end of year
(Note 13) $ 15,607 $ 2,599
--------------------------
--------------------------
See accompanying notes to consolidated financial statements.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
December 31, 2008 and 2007
-------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Bankers Petroleum Ltd. (Company) is engaged in the exploration for
and development and production of oil in Albania. The Company is
listed on the Toronto Stock Exchange and the Alternative Investment
Market (AIM) of the London Stock Exchange under the symbol BNK.
The Company operates in the Albanian oilfields pursuant to petroleum
agreements with Albpetrol Sh.A (Albpetrol), the state owned oil
company, under Albpetrol's existing license with the Albanian
National Agency for Natural Resources (AKBN). The Patos Marinza
agreement and Kucova agreement became effective in March 2006 and
September 2007 respectively and have a 25 year term with an option to
extend at the Company's election for further five year increments.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles.
The principal accounting policies are outlined below:
(a) Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries: Bankers Petroleum
International Ltd., Bankers Petroleum Albania Ltd. (BPAL) and
Sherwood International Petroleum Ltd.
(b) Financial instruments
All financial instruments within its scope, including all derivatives
are recognized on the balance sheet initially at fair value.
Subsequent measurement of all financial assets and liabilities except
those held-for-trading and available for sale are measured at
amortized cost determined using the effective interest rate method.
Held-for-trading financial assets are measured at fair value with
changes in fair value recognized in earnings. Available-for-sale
financial assets are measured at fair value with changes in fair
value recognized in comprehensive income and reclassified to earnings
when impaired.
Cash and cash equivalents and short-term deposits are held-for-
trading investments and the fair values approximate their carrying
value due to their short-term nature. Accounts receivable is
classified as loans and receivables and the fair value approximates
their carrying value due to the short-term nature of these
instruments. The note receivable is classified as other financial
asset and its fair value approximates the carrying value as it bears
interest at market rate. The accounts payable and accrued liabilities
are classified as other financial liabilities and the fair value
approximates their carrying value due to the short-term nature of
these instruments. The operating loans and term loan are classified
as other financial liabilities and their fair value approximates
their carrying value as they bear interest at market rates.
The Company has designated its investments in marketable securities
as available-for-sale.
The Company has elected to expense transaction costs as incurred.
(c) Foreign currency translation
Transactions denominated in foreign currencies are translated into
United States dollar equivalents at exchange rates approximating
those in effect at the transaction dates. Foreign currency
denominated monetary assets and liabilities are translated at the
year-end exchange rate. Gains and losses arising from foreign
currency translation are recognized in the statement of operations
and deficit.
(d) Use of Estimates
Timely preparation of the financial statements in conformity with
Canadian generally accepted accounting principles requires that
management make estimates and assumptions and use judgment regarding
assets, liabilities, revenues and expenses. Such estimates primarily
relate to unsettled transactions and events as of the date of the
financial statements. Accordingly, actual results may differ from
estimated amounts as future confirming events occur.
Amounts recorded for depletion, depreciation, asset retirement
obligations, future income taxes, and amounts used for asset
impairment calculations are based on estimates of oil reserves and
future costs required to develop these reserves.
(e) Revenue recognition
Revenue associated with the sales of the Company's oil is recognized
in income when title and risk pass to the buyer, collection is
reasonably assured and the price is determinable.
(f) Income taxes
Future income taxes are recorded using the asset and liability
method. Under the asset and liability method, future tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Future tax assets and liabilities are measured using the
enacted or substantively enacted tax rates expected to apply when the
asset is realized or the liability settled. The effect on future tax
assets and liabilities of a change in tax rates is recognized in
income in the period that substantive enactment or enactment occurs.
To the extent that the Company does not consider it more likely than
not that a future tax asset will be recovered, it provides a
valuation allowance against the excess.
(g) Per share amounts
Basic earnings (loss) per share is calculated using the weighted-
average number of common shares outstanding during the year. The
Company uses the treasury stock method to compute the dilutive effect
of options, warrants and similar instruments. Under this method, the
dilutive effect on earnings per share is recognized on the use of the
proceeds that could be obtained upon exercise of options, warrants
and similar instruments. It assumes that the proceeds would be used
to purchase common shares at the average market price during the
period.
(h) Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments
with original maturities of three months or less.
(i) Crude oil inventory
Crude oil inventory is valued at the lower of average cost of
production and net realizable value. Effective January 1, 2008, the
Company adopted the new CICA accounting standard (section 3031) on
inventories which establishes standards for the measurement and
disclosure of inventories including guidance on the determination of
cost. The adoption of this standard did not have a significant impact
on the Company's consolidated financial statements.
(j) Property, plant and equipment
Capitalized Costs
-----------------
The Company follows the full cost method of accounting for its oil
operations whereby all costs associated with the exploration for and
development of oil reserves are capitalized on a country-by-country
basis. Such costs include land acquisition costs, geological and
geophysical expenses, carrying charges on non-producing properties,
costs of drilling both productive and non-productive wells,
production equipment, overhead charges directly related to
acquisition, exploration and development activities and asset
retirement costs.
Depletion and Depreciation
--------------------------
Capitalized costs within each country are depleted and depreciated on
the unit-of-production method based on the estimated gross proved
reserves determined by independent petroleum engineers. Depletion and
depreciation is calculated using the capitalized costs, plus the
estimated future costs to be incurred in developing proved reserves,
net of estimated salvage value. Costs of acquiring and evaluating
unproved properties are initially excluded from the depletion and
depreciation calculation until it is determined whether or not proved
reserves can be assigned to such properties.
Proceeds from the sale of oil properties are applied against
capitalized costs, with no gain or loss recognized, unless such a
sale would alter the rate of depletion and depreciation by more than
20 per cent in a particular country cost centre, in which case a gain
or loss on disposal is recorded.
Office and computer equipment are depreciated on the declining
balance method at rates of 20 to 30 percent.
Ceiling test
------------
The Company uses Canadian standards for full cost accounting and for
the ceiling test calculation pertaining to the recognition and
measurement of impairment of petroleum properties. In applying the
full cost method, the Company evaluates its petroleum assets to
determine that the carrying amount in each cost centre is recoverable
and does not exceed the fair value of the properties in the cost
centre. The carrying amounts are assessed to be recoverable when the
sum of the undiscounted cash flows expected from the production of
proved reserves and the lower of cost and the market of unproved
properties exceeds the carrying amount of the cost centre. When the
carrying amount is not recoverable, an impairment loss is recognized
to the extent the carrying amount of the cost centre exceeds the sum
of the discounted cash flows expected from the production of proved
and probable reserves and the lower of cost and market of unproved
properties of the cost centre.
Asset retirement obligations
----------------------------
The fair value of estimated asset retirement obligations is
capitalized to property, plant and equipment in the period in which
the liability is incurred. Asset retirement obligations include those
legal obligations where the Company will be required to retire
tangible long-lived assets such as producing well sites and
facilities. Asset retirement costs for oil properties are amortized
as part of depletion and depreciation using the unit-of-production
method.
Increases in the asset retirement obligations resulting from the
passage of time are recorded as accretion expense. Actual abandonment
expenditures incurred are charged against the accumulated obligation.
(k) Stock-based compensation
Compensation costs attributable to all stock options granted to
employees, directors and service providers are measured at fair value
at the date of grant using the Black Scholes option pricing model and
expensed over the vesting period with a corresponding increase to
contributed surplus. Upon exercise of the option, consideration
received, together with the amount previously recognized in
contributed surplus, is recorded as an increase to share capital.
(l) Comparative figures
The consolidated financial statements include the accounts of the
Company and its wholly-owned operating subsidiary - BPAL. Effective
July 1, 2008, the operations of Bankers Petroleum (U.S.) Inc., a
former wholly-owned subsidiary of the Company, were transferred into
a new, independent company, BNK Petroleum Inc. (BKX) (Note 15). As a
result, certain prior period figures have been re-classified to
conform to the current period's presentation.
Unless otherwise noted, the consolidated financial statements and
their accompanying notes are presented in thousands of United States
dollars.
3. RESTRICTED CASH
The Company has placed $1,500 (2007 - nil) with a Canadian Chartered
Bank as security for certain capital projects in Albania by November
2009. The funds are invested in an interest bearing revolving term
deposit.
4. INVESTMENTS
2008 2007
---------------------------------------------------------------------
Marketable securities $ 134 $ 1,120
--------------------------
--------------------------
As at December 31, 2008, the Company held certain marketable
securities which were designated as available-for-sale financial
instruments. The fair value of the investments at that date was $134
(2007 - $1,120) and the decline in the value of the investments was
determined to be "other-than-temporary". Accordingly, the investments
were written down to their market value with the unrealized loss
charged to earnings.
5. NOTE RECEIVABLE
The note receivable of $13,000 (2007 - nil) represents the residual
amount due from BKX. The note, which is due on October 2012, accrues
interest at LIBOR plus 5.5% and is secured by a floating charge
debenture and a general security agreement. At December 31, 2008, no
principal or interest amounts were due. The Company is entitled to
receive up to 50% of any future equity financing by BKX and 90% of
any increase in BKX's borrowing base as repayment of this note. The
Company has no further obligation to increase the note. BKX is
considered a related party as BKX and the Company have two common
directors. The above transaction is considered to be in the normal
course of business and has been measured at the exchange amount being
the amounts agreed to by both the parties.
6. PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the Company's property, plant and
equipment as at December 31:
2008
---------------------------------------
Accumulated
Depletion
and Net Book
Cost Depreciation Value
---------------------------------------
Oil and gas properties $ 186,650 $ 27,812 $ 158,838
Equipment, furniture and
fixtures 3,400 1,214 2,186
---------------------------------------
$ 190,050 $ 29,026 $ 161,024
---------------------------------------
---------------------------------------
2007
---------------------------------------
Accumulated
Depletion
and Net Book
Cost Depreciation Value
---------------------------------------
Oil and gas properties $ 107,273 $ 15,009 $ 92,264
Equipment, furniture and
fixtures 2,443 600 1,843
---------------------------------------
$ 109,716 $ 15,609 $ 94,107
---------------------------------------
---------------------------------------
The depletion expense calculation for the year ended December 31,
2008, excluded $3,909 (2007 - nil) relating to undeveloped and non-
producing properties in Albania.
Depletion for the year ended December 31, 2008 included $294,000
(2007 - $206,000) for estimated future development costs associated
with proved undeveloped reserves in Albania.
The Company capitalized general and administrative expenses and
stock-based compensation of $3,400 (2007 - $2,003) that were directly
related to exploration and development activities in Albania.
The Company's ceiling test calculations for the Albania cost centre,
as at December 31, 2008 resulted in no impairment loss. The future
prices used by the Company in estimating cash flows were based on
forecasts by independent reserves evaluators, adjusted for the
Company's quality and transportation differentials. The following
table summarizes the benchmark prices used in the calculation:
---------------------------------------------------------------------
Brent Price
Year (US$/barrel)
---------------------------------------------------------------------
2009 55.00
2010 68.00
2011 78.00
2012 83.00
2013 86.00
Average annual increase, thereafter 2%
---------------------------------------------------------------------
---------------------------------------------------------------------
Bankers has no capital commitments for the Patos Marinza oilfield
under the Petroleum Agreement. The Petroleum Agreement stipulates
that the Company annually submit to AKBN a work program which
includes the nature and the amount of capital expenditures to be
incurred in that year. Significant deviations in this annual program
from the Plan of Development will be subject to AKBN approval.
Disagreements between the parties will be referred to an independent
expert whose decision will be binding. The Company has the right to
relinquish a portion or all of the contract area. Any relinquishment
will reduce the associated capital expenditure commitments. If only a
portion of the contract area is relinquished, the Company will
continue to conduct petroleum operations on the portion retained and
the future capital expenditures will be adjusted accordingly.
7. TERM AND OPERATING LOAN FACILITY
The Company has established credit facilities with a European
financial institution based in Albania. The credit facility is
comprised of a $16,000 operating loan, a $1,500 ((euro) 1 million)
bridge facility and a $10,625 term loan. The facility is secured by
all of the assets of BPAL, assignment of proceeds from the Albanian
domestic and export crude oil sales contracts, a pledge of the common
shares of BPAL and a guarantee by the Company. The credit facilities
are subject to certain covenants requiring the maintenance of certain
financial ratios, all of which were met as at December 31, 2008.
(a) Operating Loans
Operating loans consist of a one year facility bearing interest at
revolving LIBOR plus 3.5% and a bridge facility bearing interest at
revolving LIBOR plus 4.5%. The term of the one year operating loan
may be extended for further twelve month periods up to four times
upon request by the Company and acceptance by the lender. As at
December 31, 2008, both of the facilities were fully utilized.
(b) Term Loan
The term loan bears interest at one year LIBOR plus 4.5% and is
repayable in equal monthly instalments of $313 ending on October 31,
2011. As at December 31, 2008, the entire term loan was utilized. Of
the amount outstanding, $3,750 is classified as current and $6,875 as
long-term.
Principal repayments of the term loan over the next three years are
as follows:
---------------------------------------------------------------------
2009 $ 3,750
2010 3,750
2011 3,125
--------------
$ 10,625
--------------
--------------
(c) Subsequent to December 31, 2008, the Company received approval
for an $8,000 increase to its existing credit facility with a
European financial institution based in Albania, as follows:
i) The existing $16,000 operating loan facility will be
increased by $4,000 with an interest rate relative to the
bank's refinancing rate plus 3.5%, renewable annually. The
term of the operating loan may be extended for further
twelve month periods up to four times upon request by the
Company and acceptance by the lender.
ii) A new $4,000 five-year term facility bearing an interest
rate relative to the bank's refinancing rate plus 4.65% was
approved. The facility has no scheduled repayments during
the first six months, after which it is repayable in equal
monthly instalments over a 54-month period.
iii) The interest on the existing $10,625 term loan will change
to a rate relative to the bank's financing rate plus 4.5%.
The principal repayments will remain as disclosed in
Note 7(b).
8. ASSET RETIREMENT OBLIGATIONS
In Albania, the Company estimated the total undiscounted amount
required to settle the asset retirement obligations at $21,352
(2007 - $15,058). These obligations will be settled at the end of
the Company's 25-year license of which 23 years are remaining. The
liability has been discounted using a credit-adjusted risk-free
interest rate of 10% (2007 - 9%) and an inflation rate of 2.5% to
arrive at asset retirement obligations of $2,896 as at December 31,
2008.
---------------------------------------------------------------------
Asset retirement obligations, December 31, 2007 $ 2,177
Liabilities incurred during the year 481
Accretion 238
--------------
Asset retirement obligations, December 31, 2008 $ 2,896
--------------
--------------
9. SHAREHOLDERS' EQUITY
(a) Share capital
Authorized
Unlimited number of common shares with no par value.
Issued
Number of
Common Shares Amount
---------------------------------------------------------------------
Balance, December 31, 2006 412,066,634 $ 116,696
Prospectus offering 36,042,858 19,227
Private placement 4,400,000 1,703
Share issuance costs - (1,113)
---------------------------
Balance, December 31, 2007 452,509,492 136,513
Consolidation adjustment(x) (301,672,995) -
Discontinued operations (Note 15) - (97,472)
Private placement 22,222,222 59,749
Stock options exercised 6,179,624 15,038
Warrants exercised 3,301,838 9,569
Share issuance costs - (1,490)
---------------------------
Balance, December 31, 2008 182,540,181 $ 121,907
---------------------------
---------------------------
(x) On July 30, 2008, the Company's shares, warrants and options were
consolidated on a one-for-three (1:3) basis, as approved by the
shareholders.
The weighted average number of common shares used in the calculation
of basic and diluted loss per share was 176,334,158 in 2008 (2007 -
147,616,654). In computing diluted loss per share for the year ended
December 31, 2008, no common shares were added to the basic weighted
average number of common shares outstanding (2007 - nil) for the
dilutive effect of stock options and warrants.
(b) Warrants
A summary of the changes in warrants is presented below:
Weighted
Average
Exercise
Number of Price
Warrants Amount (CAD $)
---------------------------------------------------------------------
Balance, December 31, 2007 38,323,452 $ 2,539 -
Consolidation adjustment(x) (25,548,968) - -
--------------------------
12,774,484 2,539 2.45
Issued for cash 240,729 255 1.97
Transferred to share
capital on exercise (3,301,838) (706) 2.97
---------------------------------------
Balance, December 31, 2008 9,713,375 $ 2,088 2.46
---------------------------------------
---------------------------------------
The following table summarizes the outstanding and exercisable
warrants at December 31, 2008:
---------------------------------------------------------------------
Number of Weighted
Warrants Average
Outstanding Exercise
and Price
Expiry Date Exercisable (CAD $)
---------------------------------------------------------------------
November 10, 2009 3,573,041 2.49
November 15, 2010 1,266,667 2.63
March 1, 2012 4,873,667 2.37
-------------------------
9,713,375 2.46
-------------------------
-------------------------
(c) Stock Options
The Company has established a "rolling" Stock Option Plan. The number
of shares reserved for issuance may not exceed 10% of the total
number of issued and outstanding shares and, to any one optionee, may
not exceed 5% of the issued and outstanding shares on a yearly basis
or 2% if the optionee is engaged in investor relations activities or
is a consultant. The exercise price of each option shall not be less
than the market price of the Company's stock at the date of grant.
A summary of the changes in stock options is presented below:
Weighted
Average
Exercise
Number of Price
Options (CAD $)
---------------------------------------------------------------------
Balance, December 31, 2007 37,155,000 -
Consolidation adjustment(x) (24,770,000) -
-------------
12,385,000 1.92
Granted 6,766,667 2.47
Exercised (6,179,624) 1.81
Forfeited (1,035,915) 2.24
--------------------------
Balance, December 31, 2008 11,936,128 2.26
--------------------------
--------------------------
The following table summarizes the outstanding and exercisable
options at December 31:
2008 2007
------------------------------- ----------------------------
Weighted Weighted
Average Average
Range of Remaining Remaining
Exercise Contrac- Contrac-
Price Out- Exer- tual Out- Exer- tual
(CAD$) standing cisable Life standing cisable Life
-------------------------------------------------------------------------
0.50 - 1.00 46,291 46,291 0.4 2,050,000 2,050,000 1.4
1.01 - 1.50 3,737,500 1,502,777 4.6 1,686,667 726,111 4.1
1.51 - 2.00 1,939,612 1,365,298 3.4 3,908,333 1,024,999 4.3
2.01 - 3.00 1,218,390 538,686 3.7 910,000 854,445 2.4
3.01 - 3.50 2,649,334 2,649,334 2.1 3,288,333 2,558,889 3.1
3.51 - 4.00 166,667 100,000 3.4 541,667 541,667 2.8
4.01 - 4.50 1,878,333 626,111 4.3 - - -
4.51 - 5.00 300,000 100,000 4.5 - - -
---------------------- ----------------------
11,936,128 6,928,498 12,385,000 7,756,111
---------------------- ----------------------
---------------------- ----------------------
(d) Stock-based Compensation
Using the fair value method for stock-based compensation, the Company
calculated stock-based compensation expense for the year ended
December 31, 2008 as $8,759 (2007 - $3,053) for the stock options
vested and/or granted to officers, directors, employees and service
providers. Of this amount $7,283 (2007 - $2,882) was charged to
earnings and $1,476 (2007 - $171) was capitalized. The Company
determined these amounts using the Black-Scholes option pricing model
assuming a risk free interest rate range of 2.67% to 3.50% (2007 -
3.87% to 4.72%), a dividend yield of 0% (2007 - 0%), a forfeiture
rate of 0% (2007 - 0%), an expected volatility range of 69% to 101%
(2007 - 59% to 67%) and expected lives of the stock options of five
years (2007 - five) from the date of grant.
(e) Contributed Surplus
The following table summarizes the change in contributed surplus as
of December 31:
2008 2007
---------------------------------------------------------------------
Balance, beginning of year $ 8,308 $ 4,456
Stock-based compensation (including
discontinued operations of $377, 2007 -
$799) 9,136 3,852
Discontinued operations (Note 15) (1,591) -
Transferred to share capital on exercise (3,991) -
--------------------------
Balance, end of year $ 11,862 $ 8,308
--------------------------
--------------------------
10. SEGMENTED INFORMATION
The Company defines its reportable segments based on geographic
locations.
Year ended December 31, 2008 Albania Canada Total
---------------------------------------------------------------------
Revenue
Oil revenue $ 110,253 $ - $ 110,253
Royalties (22,852) - (22,852)
Interest - 1,501 1,501
---------------------------------------
87,401 1,501 88,902
---------------------------------------
Expenses
Operating 28,745 - 28,745
Sales and transportation 7,515 - 7,515
General and administrative 3,036 4,335 7,371
Interest and bank charges 1,105 - 1,105
Interest on term loan 1,148 - 1,148
Foreign exchange (gain) loss (649) 5,222 4,573
Write down of investments - 986 986
Stock-based compensation 784 6,499 7,283
Depletion, depreciation and
accretion 13,507 148 13,655
---------------------------------------
55,191 17,190 72,381
---------------------------------------
Income (loss) from continuing
operations before income
taxes 32,210 (15,689) 16,521
Future income tax expense (18,108) - (18,108)
---------------------------------------
Income (loss) from continuing
operations $ 14,102 $ (15,689) (1,587)
--------------------------
--------------------------
Discontinued operations (188)
-------------
Net loss for the year $ (1,775)
-------------
-------------
Assets, December 31, 2008 $ 181,505 $ 33,170 $ 214,675
---------------------------------------
---------------------------------------
Additions to property, plant
and equipment $ 78,315 $ 63 $ 78,378
---------------------------------------
---------------------------------------
During the year, the Albania segment recorded domestic sales of
$54,387 (2007 - $28,806) and export sales of $55,866 (2007 -
$32,483).
Year ended December 31, 2007 Albania Canada Total
---------------------------------------------------------------------
Revenue
Oil revenue $ 61,289 $ - $ 61,289
Royalties (7,251) - (7,251)
Interest 2 401 403
---------------------------------------
54,040 401 54,441
---------------------------------------
Expenses
Operating 17,900 - 17,900
Sales and transportation 4,182 - 4,182
General and administrative 3,002 4,392 7,394
Interest and bank charges 666 - 666
Interest on term loan 1,244 - 1,244
Foreign exchange (gain) loss (305) (995) (1,300)
Write down of investments - 3,430 3,430
Stock-based compensation 864 2,018 2,882
Depletion, depreciation and
accretion 8,803 100 8,903
---------------------------------------
36,356 8,945 45,301
---------------------------------------
Income (loss) from continuing
operations before income taxes 17,684 (8,544) 9,140
Future income tax expense (10,274) - (10,274)
---------------------------------------
Income (loss) from continuing
operations $ 7,410 $ (8,544) (1,134)
--------------------------
--------------------------
Discontinued operations (1,208)
-------------
Net loss for the year $ (2,342)
-------------
-------------
Assets, December 31, 2007 $ 111,647 $ 3,392 $ 115,039
---------------------------------------
---------------------------------------
Additions to property, plant
and equipment $ 45,507 $ 303 $ 45,810
---------------------------------------
---------------------------------------
11. INCOME TAXES
Future income tax expense relates to the Albanian operations and
results from the following as of December 31:
2008 2007
---------------------------------------------------------------------
Net book value of property, plant and
equipment, net of asset retirement
obligations $ 151,972 $ 91,600
Cost recovery pool (88,956) (64,800)
--------------------------
Timing difference $ 63,016 $ 26,800
--------------------------
--------------------------
Future income tax liability at 50% $ 31,508 $ 13,400
--------------------------
--------------------------
The cost recovery pool represents deductions for income taxes in
Albania.
The provision for income taxes reported differs from the amounts
computed by applying the cumulative Canadian federal and provincial
income tax rates to the loss before tax provision due to the
following:
2008 2007
---------------------------------------------------------------------
Earnings before income taxes $ 16,521 $ 9,140
Statutory tax rate 29.50% 32.12%
--------------------------
4,874 2,936
Difference in tax rates between
Albania and Canada 6,603 3,162
Non-deductible expenses 3,092 926
Taxable gain on discontinued operations 1,857 -
Foreign exchange differences 3,619 -
Valuation allowance and other (1,937) 3,250
--------------------------
Future income tax expense $ 18,108 $ 10,274
--------------------------
--------------------------
The significant components of the Company's future income tax assets
and liabilities are as follows:
2008 2007
---------------------------------------------------------------------
Future income tax assets:
Non-capital loss carry forwards $ 2,633 $ 3,473
Unrealized capital loss (22) 858
Share issue costs 766 904
Property, plant and equipment (855) 88
Less: valuation allowances (2,522) (5,323)
--------------------------
Future income tax assets $ - $ -
--------------------------
--------------------------
Future income tax liabilities:
Property, plant and equipment - Albania $ 31,508 $ 13,400
--------------------------
Future income tax liability $ 31,508 $ 13,400
--------------------------
--------------------------
The Company has available for deduction against future Canadian
taxable income non-capital losses of approximately $10,500. These
losses, if not utilized, will expire commencing 2010.
The potential income tax benefits of these future income tax assets
have been offset by a valuation allowance and have not been recorded
in these financial statements.
Future income tax liabilities result from the temporary differences
between the carrying value and tax values of its Albanian assets and
liabilities.
12. COMMITMENTS
The Company leases office premises, of which the minimum lease
payments for the next four years are:
Albania Canada Total
---------------------------------------------------------------------
2009 $ 141 $ 232 $ 373
2010 141 55 196
2011 141 - 141
2012 6 - 6
----------------------------------------
$ 429 $ 287 $ 716
----------------------------------------
----------------------------------------
The Company is committed to contributing $730 ((euro) 500,000) to a
dedicated oil export terminal facility upon service commencement in
the second half of 2009, and will pay a throughput rate when the
facility is operational.
The Company has debt repayment commitments as disclosed in Note 7(b).
13. SUPPLEMENTAL CASH FLOW INFORMATION
2008 2007
---------------------------------------------------------------------
Operating activities
Decrease (increase) in current assets
Accounts receivable $ (2,213) $ (8,174)
Inventory (603) (273)
Deposits and prepaid expenses (381) 54
Increase in current liabilities
Accounts payable and accrued liabilities 10,516 6,679
--------------------------
$ 7,319 $ (1,714)
--------------------------
--------------------------
Investing activities
Increase (decrease) in current liabilities
Accounts payable and accrued liabilities $ 5,169 $ (3,184)
--------------------------
--------------------------
Cash and cash equivalents
Cash $ 933 $ 1,099
Fixed income investments 14,674 1,500
--------------------------
$ 15,607 $ 2,599
--------------------------
--------------------------
Interest paid $ 2,253 $ 1,237
--------------------------
--------------------------
Interest received $ 1,047 $ 403
--------------------------
--------------------------
14. FINANCIAL INSTRUMENTS
Effective January 1, 2008, the Company adopted the new CICA
accounting standards relating to financial instruments and capital
disclosures (sections 3862, 3863 and 1535).
Financial risk management
Overview
The Company has exposure to credit, liquidity and market risk. This
note presents information about the Company's exposure to each risk,
the Company's objectives, policies and processes for measuring and
managing risk, and management of capital.
The Board of Directors of the Company has the overall responsibility
for the establishment and oversight of the Company's risk management
framework. The Board has implemented and monitors compliance with
risk management policies. The Company's risk management policies are
established to identify and analyze the risks faced, to set
appropriate risk limits and controls, and to monitor risks and
adherence to market conditions and the Company's activities.
Credit risk
Credit risk is the risk of financial loss to the Company if a
customer or counterparty to a financial instrument fails to meet its
contractual obligations, and arises principally from the Company's
receivables from petroleum refineries relating to accounts
receivable. As at December 31, 2008, the Company's receivables
consisted of $16,867 (2007 - $15,018) of receivables from petroleum
refineries and $724 (2007 - $360) of other trade receivables, as
summarized below:
30-60 61-90 Over 90
Current days days days Total
---------------------------------------------------------------------
Albania $ 8,135 $ 4,815 $ 3,335 $ 582 $16,867
Canada 240 - - 484 724
-------------------------------------------------
$ 8,375 $ 4,815 $ 3,335 $ 1,066 $17,591
-------------------------------------------------
-------------------------------------------------
In Albania, the Company considers any amounts greater than 60 days as
past due. The accounts receivable, included in the table, past due or
not past due are not impaired. They are from counterparties with whom
the Company has a history of timely collection and the Company
considers the accounts receivable collectible. Domestic receivables
from a petroleum refinery are due by the end of the month following
production. Export receivables are collected within 30 days from the
date of the shipment. The Company's policy to mitigate credit risk
associated with these balances is to establish marketing
relationships with large purchasers. Of the total receivables of
$16,867 in Albania, approximately $13,558 is due from one domestic
customer of which $3,917 is considered past due.
In Canada, no amounts are considered past due or impaired.
The carrying amount of accounts receivable represents the maximum
credit exposure. As of December 31, 2008 and December 31, 2007, the
Company does not have an allowance for doubtful accounts and did not
provide for any doubtful accounts nor was it required to write-off
any receivables.
The Company also has credit risk with respect to the $13,000 Note
Receivable from BKX and regularly monitors the operations and
financial condition of the borrower (See Note 5). At December 31,
2008, no principal or interest amounts were due.
Cash and cash equivalents consist of cash, bank balances and short-
term deposits with original maturities of less than 90 days. The
Company manages the credit exposure related to short-term investments
by selecting counter parties based on credit ratings and monitors all
investments to ensure a stable return, avoiding complex investment
vehicles with higher risk such as asset backed commercial paper.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet
its financial obligations as they are due. The Company's approach to
managing liquidity is to plan that it will have sufficient liquidity
to meet its liabilities when due, under both normal and stressed
conditions without incurring unacceptable losses or risking harm to
the Company's reputation.
The timing of cash flows relating to financial liabilities as at
December 31, 2008, is as follows:
2009 2010 2011
---------------------------------------------------------------------
Accounts payable and accrued
liabilities $ 26,788 $ - $ -
Operating loans 17,500 - -
Term loan 3,750 3,750 3,125
---------------------------------------
Total financial liabilities $ 48,038 $ 3,750 $ 3,125
---------------------------------------
---------------------------------------
The Company prepares annual capital expenditure budgets, which are
regularly monitored and modified as considered necessary. Further,
the Company utilizes authorizations for expenditures on both operated
and non-operated projects to further manage capital expenditures. To
facilitate the capital expenditure program, the Company has a
revolving credit facility with a European financial institution based
in Albania, as disclosed in note 7, which is reviewed annually by the
lender. The Company also attempts to match its payment cycle with
collection of petroleum revenues. The Company maintains a close
working relationship with the European bank that provides its credit
facility and has been advised that the current economic turmoil is
not impacting on the bank's ability to fund any credit facilities.
The renewal of and increase in the existing credit facility has been
approved subsequent to the year end (Note 7(c)).
Market risk
Market risk is the risk that changes in market prices, such as
foreign exchange rates, commodity prices, and interest rates will
affect the Company's net income. The objective of market risk
management is to manage and control market risk exposures within
acceptable limits, while maximizing returns.
Foreign currency exchange rate risk
Foreign currency exchange rate risk is the risk that the fair value
of future cash flows will fluctuate as a result of changes in foreign
exchange rates. As at December 31, 2008, a 10% change in the foreign
exchange rate of the Canadian dollar against the United States
dollar, with all other variables held constant, would affect after
tax net income for the year by $1,532 (2007 - $173). The sensitivity
is higher in 2008 as compared to 2007 because of an increase in
Canadian dollar cash and cash equivalents outstanding.
As at December 31, 2008, a 10% change in the foreign exchange rate of
the Albanian Lek against United States dollar, with all other
variables held constant, would affect after tax net income for the
year by $14 (2007 - $85). The sensitivity is lower in 2008 compared
to 2007 because of a decrease in Albania Lek cash and cash
equivalents outstanding.
The Company had no forward foreign exchange rate contracts in place
as at or during the year ended December 31, 2008.
Commodity price risk
Commodity price risk is the risk that the value of future cash flows
will fluctuate as a result of changes in commodity prices. Commodity
prices for petroleum and natural gas are impacted by world economic
events that dictate the levels of supply and demand. The Company's
primary revenues are from heavy oil sales in Albania, priced on a
quality differentiated basis, to the Brent oil price. As at
December 31, 2008, a $1 per barrel change in the Brent oil price,
with all other variables held constant, would affect after tax net
income for the year by $460 (2007 - $410).
The Company has not attempted to mitigate commodity price risk
through the use of various financial derivative and physical delivery
sales contracts.
Interest rate risk
Interest rate risk is the risk that future cash flows will fluctuate
as a result of changes in market interest rates. The Company is
exposed to interest rate fluctuations on its bank debt which bears a
floating rate of interest. As at December 31, 2008, a 10% change in
the interest rate, with all other variables held constant, would
affect after tax net income for the year by $253 (2007 - $277).
The Company had no interest rate swap or financial contracts in place
as at December 31, 2008.
Capital management
The Company's policy is to maintain a strong capital base thereby
establishing investor, creditor and market confidence and to sustain
future business development. The Company manages its capital
structure and makes necessary adjustments in light of changes in
economic conditions and the risk characteristics of the underlying
petroleum and natural gas assets. The Company's capital structure
included shareholders' equity, bank debt and working capital. In
order to maintain the capital structure, the Company may from time to
time issue shares and adjust capital spending to manage current and
projected debt levels.
The Company monitors capital based on the ratio of debt to annualized
cash flow. This ratio is calculated as net debt (outstanding bank
debt plus or minus working capital) divided by cash provided by
operating activities before changes in non-cash working capital for
the most recent quarter, annualized. The Company's strategy is to
maintain a debt/cash flow ratio of no more than 1.5 to 1. This ratio
may increase at certain times as a result of acquisitions. In order
to monitor this ratio, the Company prepares annual capital
expenditure budgets, which are updated as necessary depending on
varying factors including current and forecast prices, successful
capital deployment and general industry conditions. The annual and
updated budgets are approved by the Board of Directors.
As at December 31, 2008 and December 31, 2007, the Company's ratio of
net debt to annualized cash flow were 0.29 and 0.87 to 1,
respectively, which were within the range established by the Company.
The Company's share capital is not subject to external restrictions;
however the bank debt facility is based on certain covenants, all of
which were met as at December 31, 2008. The Company has not paid or
declared any dividends since the date of incorporation, nor are any
contemplated in the foreseeable future.
15. DISCONTINUED OPERATIONS
Pursuant to shareholders' approval at the Annual and Special General
Meeting on June 27, 2008, the Company completed a plan of
arrangement, effective July 1, 2008, which resulted in all of the
Company's US operations and assets being transferred into a new,
independent company: BNK Petroleum Inc. (BKX). Accordingly, the
operations of BKX have been classified as discontinued operations.
Total restructuring costs amounted to $2,796 for the year ended
December 31, 2008.
The following table provides additional information with respect to
amounts included in the results of discontinued operations:
2008 2007
---------------------------------------------------------------------
Revenue $ 3,144 $ 987
Expenses 3,332 2,195
--------------------------
Discontinued operations $ (188) $ (1,208)
--------------------------
--------------------------
The following table provides additional information with respect to
amounts included in the balance sheet of discontinued operations as
of December 31:
2008 2007
---------------------------------------------------------------------
Cash and cash equivalents $ - $ 961
Accounts receivable - 5,750
Deposits and prepaid expenses - 751
--------------------------
$ - $ 7,462
--------------------------
--------------------------
Property, plant and equipment $ - $ 81,794
--------------------------
--------------------------
Accounts payable and accrued liabilities $ - $ 7,340
--------------------------
--------------------------
Asset retirement obligations $ - $ 433
--------------------------
--------------------------
The following table summarizes the assets, liabilities and
shareholders' equity transferred to BKX effective July 1, 2008 as a
result of the discontinued operations:
ASSETS
Current assets
Cash and cash equivalents $ 351
Accounts receivable 16,451
Deposits and prepaid expenses 2,441
-------------
19,243
Property, plant and equipment 105,830
-------------
$ 125,073
-------------
-------------
LIABILITIES
Current liabilities
Notes payable $ 10,535
Accounts payable and accrued liabilities 17,262
-------------
27,797
Asset retirement obligations 609
SHAREHOLDERS' EQUITY
Share capital 97,472
Contributed surplus 1,591
Deficit (2,396)
-------------
96,667
-------------
$ 125,073
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-------------